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AGEM Index

Carried by the rising tide of positive economic and financial data, the AGEM Index climbed at a rate not seen since October 2011. With two months of positive growth in the United States labor market, coupled with rising GDP, consumer spending and confidence, the broader equities markets took note of the encouraging recovery. During the month of February, the Dow Jones Industrial Average rose 2.5 percent and remained above 13,000 at the end of trading for the first time since May 2008. Another milestone was met by the NASDAQ, which briefly reached 3,000 during the month, a level it has not seen since the tech bubble in 2000. The NASDAQ closed the month up 5.4 percent, while the S&P 500 posted a 4.1 percent gain.

For the third consecutive month, the majority of global gaming suppliers recorded a gain in their stock price. Although the overall AGEM Index has yet to recover losses witnessed in the fall of 2011, it did grow by 3.6 percent during the month of February, reaching a composite score of 121.71, for a gain of 4.21 points during the shortened trading month. Compared to a year ago, the AGEM Index is up 18 percent. While uncertainty among elevated deficit levels still remains, a likely recession ongoing in Europe, and the long-term unemployed in the U.S. will continue to hang over a broader recovery.

Selected positive contributors to the index during February 2012 included the following:

• Aristocrat Technologies (ALL) recorded a 12.65-percent increase in its stock price, contributing 1.51 points to the overall index.• Ainsworth Game Technology (AGI) added 1.38 points to the index due to a 62.69 percent gain in its stock valuation.

Selected negative contributors to the index included:

• International Game Technology (IGT) recorded a stock price decline of 5.71 percent, removing 1.64 points from the index.• Intralot S.A. (INLOT) witnessed its stock price fall by 19.88 percent, resulting in a negative contribution of 0.17 points to the overall index.

There is no doubt that the Great Recession is behind us, and as national indicators point to a recovery that is not as aggressive as one hoped, it is a recovery nonetheless. Now after more than four years of downturn or bouncing along a bottom, it’s important to understand where casino operators and ultimately their equipment suppliers stand as the sun rises over the gaming industry once more.

The majority of the global gaming equipment manufacturers currently on the AGEM Index have yet to see their stock prices rise to a level seen in December 2007 when the official recession began, but the same can be said for much of the gaming operators who dictate the forward-looking supply chain on replacement machines.

The importance of growth and new gaming markets cannot be understated when it comes to evaluating the potential performance of global gaming suppliers, but evidence suggests that casino operators are beginning to participate not only in new domestic markets (e.g., Kansas, Ohio, Massachusetts), but are trying to bet big on the next Macau abroad (e.g., Vietnam, India, Japan). This should be the case, as much of the world still has yet to develop a large middle class and offer the entertainment of gaming on a scale similar to the United States.

Nevertheless, remodeling properties in more mature markets plays just as large a role in determining the potential financial upswing for gaming suppliers. Redevelopment, including the newly remodeled Plaza in downtown Las Vegas, along with additional funds to revitalize the surrounding area, joined by more than $1 billion of capital expenditures on the nearby Las Vegas Strip is certainly a welcome sign; however, investments have taken the form of a facelift more so than acquisitions in new gaming technology. While casino operators have yet to reinvest in their gaming floors at the levels witnessed before the latest downturn, it appears investment in replacement machines will once again take hold within the next 12 to 24 months and joined by what may be a record-breaking year for visitors to Las Vegas.

Las Vegas is not the only place once again reinvesting in its core industry. The $2.4 billion Revel in Atlantic City will open in early April. The addition of smaller boutique casinos, including a potential Seminole Hard Rock is forcing nearby operators to reinvest in their properties to remain competitive.

Although a few gaming operators picked up new sales and increased the number of replacement units sold in 2011 compared to the prior year, a significant cushion of pent-up demand remains. Still, any significant new orders will be driven by casino operators’ financial ability to move forward with capital expenditures on equipment and systems.